Improving Supply Chain Performance and Managing Risk Under Weather-Related Demand Uncertainty
We consider a manufacturer-retailer supply chain for a seasonal product whose demand is weather sensitive. The retailer orders from the manufacturer (supplier) prior to the selling season and then sells to the market. We examine how a manufacturer can structure a weather-linked rebate to improve his expected profit. The proposed class of rebate contracts offers several advantages over many other contract structures, including no required verification of leftover inventory and/or markdown amounts, and no adverse effect on sales effort by the retailer. We provide a thorough analysis of the manufacturer's and retailer's decisions in this context. We show that the weather-linked rebate can take many different forms, and this flexibility allows the supplier to design contracts that are Pareto improving and/or limit his risk in offering the contract and the retailer's risk in accepting it. For weather rebates with certain characteristics, the manufacturer can fully hedge his risks of offering a weather rebate by paying a risk premium; we show how this can be accomplished. We also show that the basic structural results extend to settings in which the two parties would like to limit their risk.
Volume (Year): 56 (2010)
Issue (Month): 8 (August)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martin A. Lariviere & Evan L. Porteus, 2001. "Selling to the Newsvendor: An Analysis of Price-Only Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 3(4), pages 293-305, May.
- Gérard P. Cachon, 2004. "The Allocation of Inventory Risk in a Supply Chain: Push, Pull, and Advance-Purchase Discount Contracts," Management Science, INFORMS, vol. 50(2), pages 222-238, February.
- Vishal Gaur & Sridhar Seshadri, 2005. "Hedging Inventory Risk Through Market Instruments," Manufacturing & Service Operations Management, INFORMS, vol. 7(2), pages 103-120, April.
- Martha Starr-McCluer, 2000. "The effects of weather on retail sales," Finance and Economics Discussion Series 2000-08, Board of Governors of the Federal Reserve System (U.S.).
- Regnier, Eva, 2008. "Doing something about the weather," Omega, Elsevier, vol. 36(1), pages 22-32, February.
- Marvel, Howard P & Peck, James, 1995. "Demand Uncertainty and Returns Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 691-714, August.
- Jan A. Van Mieghem, 2007. "Risk Mitigation in Newsvendor Networks: Resource Diversification, Flexibility, Sharing, and Hedging," Management Science, INFORMS, vol. 53(8), pages 1269-1288, August.
- Harish Krishnan & Roman Kapuscinski & David A. Butz, 2004. "Coordinating Contracts for Decentralized Supply Chains with Retailer Promotional Effort," Management Science, INFORMS, vol. 50(1), pages 48-63, January.
- Dawn Barnes-Schuster & Yehuda Bassok & Ravi Anupindi, 2002. "Coordination and Flexibility in Supply Contracts with Options," Manufacturing & Service Operations Management, INFORMS, vol. 4(3), pages 171-207, May.
- Kandel, Eugene, 1996. "The Right to Return," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 329-56, April.
- Jiri Chod & Nils Rudi & Jan A. Van Mieghem, 2010. "Operational Flexibility and Financial Hedging: Complements or Substitutes?," Management Science, INFORMS, vol. 56(6), pages 1030-1045, June.
- Timothy M. Devinney & David W. Stewart, 1988. "Rethinking the Product Portfolio: A Generalized Investment Model," Management Science, INFORMS, vol. 34(9), pages 1080-1095, September.
- Terry A. Taylor, 2001. "Channel Coordination Under Price Protection, Midlife Returns, and End-of-Life Returns in Dynamic Markets," Management Science, INFORMS, vol. 47(9), pages 1220-1234, September.
- Hamilton Emmons & Stephen M. Gilbert, 1998. "Note. The Role of Returns Policies in Pricing and Inventory Decisions for Catalogue Goods," Management Science, INFORMS, vol. 44(2), pages 276-283, February.
- Ananth. V. Iyer & Mark E. Bergen, 1997. "Quick Response in Manufacturer-Retailer Channels," Management Science, INFORMS, vol. 43(4), pages 559-570, April.
- Barry Alan Pasternack, 1985. "Optimal Pricing and Return Policies for Perishable Commodities," Marketing Science, INFORMS, vol. 4(2), pages 166-176.
- Terry A. Taylor, 2002. "Supply Chain Coordination Under Channel Rebates with Sales Effort Effects," Management Science, INFORMS, vol. 48(8), pages 992-1007, August.
- M. Davis, 2001. "Pricing weather derivatives by marginal value," Quantitative Finance, Taylor & Francis Journals, vol. 1(3), pages 305-308, March.
- Kevin McCardle & Kumar Rajaram & Christopher S. Tang, 2004. "Advance Booking Discount Programs Under Retail Competition," Management Science, INFORMS, vol. 50(5), pages 701-708, May.
- Lau, Hon-Shiang & Lau, Amy Hing-Ling, 1999. "Manufacturer's pricing strategy and return policy for a single-period commodity," European Journal of Operational Research, Elsevier, vol. 116(2), pages 291-304, July.
- Glenn, David, 2004. "Returns Policies for a Pessimistic Retailer," Working Papers 04-0111, University of Illinois at Urbana-Champaign, College of Business.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:56:y:2010:i:8:p:1380-1397. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If references are entirely missing, you can add them using this form.